At first glance the decision by OPEC+ to leave oil output levels unchanged for the first quarter of next year could be viewed as confirmation the exporter group is concerned about a looming crude supply glut.
It was widely expected that the eight members of OPEC+ undertaking voluntary oil output cuts would stick to their plan of leaving production levels unchanged for the first three months of next year.
It was also no surprise that the group reiterated their commitment to market stability amid a “steady global economic outlook and current healthy oil market fundamentals as reflected in low inventories.”
The language used in the brief statement after the meeting on Sunday was familiar, but so are the issues around OPEC+’s view that the oil market is in a good place.
The market consensus is that the global oil market is facing a series of issues, some of which are pulling prices in different directions.
An example of this is the conundrum of how to view the ongoing conflict in Ukraine and the moves to reach a peace agreement, which in theory will allow for a full return to the market of Russian crude and refined products.
There is the reality that Western sanctions are starting to tighten parts of the global crude and product markets.
Much of the expected glut of crude is from sanctioned exporters Russia, Iran and Venezuela.
It’s also likely that much of this oil is currently being stored on vessels at sea, with data from commodity analysts Kpler showing a surge in what is termed oil on water to just under 250 million barrels, up some 215 million barrels since September.
This means that while the crude oil may be physically present, it’s not necessarily available to be purchased and refined.
CHINA HOPES
There is some hope that China’s release of additional crude import quotas last week will allow for some Iranian and Russian cargoes to go to the world’s biggest oil importer.
But even if this does happen, it does little to relieve tight product markets unless Chinese refiners also substantially increase their exports of refined fuels, and buyers are prepared to take these products amid concerns they may have been produced from sanctioned crude.
There are expectations among product traders in Asia that China will lift fuel exports in December as many of the refiners have unused product quotas, but it still remains to be seen how many additional shipments of fuels such as diesel and gasoline will be offered to the market.
Another question is whether there will be enough extra fuel exported from China and also from other North Asian refiners, such as Japan and South Korea, to meaningfully lower the profit margins on diesel and gasoline, which reached two-year highs in November.
The market is also having to balance the reality of tightness of unsanctioned oil and products with the hope that this will be alleviated by some sort of peace deal in Ukraine.
There are encouraging words coming from the ongoing series of meetings involving the United States, Ukraine and Russia, but even if some sort of agreement is reached it is likely to take a while before Russian energy exports are able to be freely traded.
There is also the question as to whether previous buyers of Russian crude and products, especially those in Europe, would be willing to go back to buying from Moscow.
Amid all the uncertainty surrounding the outlook for the crude oil market, the only sensible course of action for OPEC+ was to sit tight.
The group still has some 3.24 million barrels per day (bpd) of production cuts in place even after raising output quotas by some 2.9 million bpd since April.
The market consensus is that OPEC+ won’t need to increase output in 2026 and may even need to cut back if it wants to keep the price of global benchmark Brent crude around the $63.20 a barrel it ended at on November 28.
But much will depend on the interplay between sanctioned crude and products and unsanctioned oil, a factor currently complicating the true state of global supply, demand and inventories.
Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn and X.
The views expressed here are those of the author, a columnist for Reuters.
(Editing by Sonali Paul)